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Economics
Advanced
Unit 4: The Global Economy
Thursday 23 June 2011 – Afternoon
Time: 2 hours
You do not need any other materials.

Paper Reference

6EC04/01
Total Marks

Instructions

black ink or ball-point pen.
• Use
in the boxes at the top of this page with your name,
• Fill
centre number and candidate number.
Answer
question from Section A and one question from Section B.
• Answer one
the questions in the spaces provided
• – there may
be more space than you need.

Information

total mark for this paper is 100.
• The
The
for each question are shown in brackets
• – usemarks
this as a guide as to how much time to spend on each question.
Questions labelled with an asterisk (*) are ones where the quality of your
• written
communication will be assessed

•

– you should take particular care on these questions with your spelling, punctuation
and grammar, as well as the clarity of expression.
Calculators may be used.

Advice

Read each question carefully before you start to answer it.
• Keep
eye on the time.
• You areanadvised
to divide your time equally between Section A and Section B.
• Check your answers
if you have time at the end.
•

SECTION A
Answer ONE question from this section
You should spend 60 minutes on this section.
*1 (a) Many countries have experienced a substantial rise in their fiscal deficits since
2008. Assess the factors which might explain this trend in the public finances of a
country of your choice.
(20)
(b) Evaluate the case for cutting public expenditure rather than raising taxes as a
means of reducing fiscal deficits.
(30)
*2 (a) Assess the causes of absolute poverty in a developing country of your choice.
(20)
(b) To what extent is reducing the number of people living in absolute poverty
sufficient to achieve economic development?
(30)
*3 (a) Assess the economic effects of the growth of trading blocs on the global
economy.
(20)
(b) The UK is a member of the European Union but has not adopted the euro as its
currency. To what extent do the benefits of membership of a monetary union such
as the Eurozone outweigh the costs?
(30)

2

*P38820A0240*

Do not use pencil. Use black ink or ball-point pen.
Put a cross in the box indicating the question from Section A that you have chosen ( ).
If you change your mind, put a line through the box ( ) and then indicate your new
question with a cross ( ).
Chosen Question Number: Question 1

Extract 1: The Impact of the World Recession on Sub-Saharan Africa
The global recession was slow to hit Africa. Its banks and stock exchanges were
isolated enough from the wider capital markets to suffer few shocks. Foreign
investment remained steady. Oil-rich countries such as Angola continued to boom.
However, reduced demand for African exports in 2009, together with the shrinking of
private investment flows, has hit the continent hard after a long period of unusually
strong growth. It is estimated that countries south of the Sahara (Sub-Saharan Africa)
on average grew by less than 2% in 2009. In many countries income has started to fall
and unemployment to rise.
Therefore, the confidence of Dominique Strauss-Kahn, the IMF’s head, who has been
touring Africa, struck some as strange. He went out of his way to praise Africa’s central
banks. He even said Africa’s economies were more dynamic than most of Asia’s. The
main point, he said, was that Africa was recovering from the global crisis faster than
expected.
According to the IMF, Sub-Saharan Africa’s economy will grow overall by 4.5% in
2010. But this may be distorted by a large boost from oil and gold, as well as from
the guaranteed aid which makes up half the budget in some countries. Kenya
will struggle to grow by 3% in 2010 and even that depends on an upswing in
tourism. Nearly every African country will grow more slowly than the 6% that many
development economists consider is the minimum necessary to allow countries with
rapidly increasing populations to maintain living standards.

Extract 2: Emerging Economies and Sub-Saharan Africa
As poor countries emerge from recession and the rich world struggles to recover,
the BRIC countries – Brazil, Russia, India and China – see an opportunity to increase
their influence. A new study by the Overseas Development Institute (ODI), says
the emerging countries, such as the BRIC countries, increasingly affect the growth
of poorer countries. China has a huge list of pledges to Africa: it has promised
$10 billion of cheap loans over 3 years; it has also offered debt forgiveness, new
hospitals, professional training for 15,000 Africans and a doubling of aid. When
Sudan ran into trouble repaying $34 billion foreign debt, it turned to China, India and
regional development funds in the Gulf. India helped to bail out Tanzania’s financial
institutions.

10

Trade and foreign direct investment (FDI) from the West are already falling, but the
middle-income countries are filling the gap. While total FDI in Africa fell by about
a third between 2008 and 2009, the flow from China rose by 80% (admittedly from
a low base). Brazil says it has invested $10 billion in the continent since 2003. Since
2009, the BRIC countries’ investments and loans have increased rapidly (see Figure 2).

15

Aid agencies consider that China and others are “rogue donors” because they give to
and support corrupt regimes. Aid from China is usually ‘tied’ to hospitals, roads and
equipment built or sold by Chinese companies. Further, much ‘aid’ is loans at nearcommercial rates of interest. African governments have had their debts to the West
mostly forgiven and are accumulating new loans elsewhere.

20

Trade with the BRIC countries may be a trap. The BRIC countries import raw materials
like copper and cotton from poor countries; rich countries tend to buy manufactured
goods such as garments. So more trade with the BRIC countries and less with the
developed world offers less chance of growth in the secondary sector – the opposite
of how China grew richer. Eswar Prasad of Cornell University says that China and
India’s enormous appetite for raw materials may help poor countries diversify their
export markets but not their industry, leaving them more dependent on volatile
commodities than before.

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*P38820A01440*

5

25

Figure 2: Examples of Foreign Direct Investment (FDI) and loans by BRIC
countries in Africa since January 2010

COUNTRY

SECTOR

$m

TYPE

BRAZIL
Angola

Oil

800

FDI

Mozambique

Mining

1 300

FDI

Nigeria

Oil

2 000

FDI

500

FDI

2 500

FDI

RUSSIA
Angola

Construction

Nigeria

Gas

INDIA
Chad

Textiles

25

Loan

Malawi

Development Projects

50

Loan

Zambia

Hydro Power

50

Loan

CHINA
Liberia

Mining

2 600

Tanzania

ICT

Zambia

Development

FDI

180

Loan

1 000

Loan

Source (for both Extract 2 and Figure 2): The Economist, 20 March 2010

*P38820A01540*

15

Turn over

(a) With reference to lines 18–19 of Extract 1, explain why many development
economists consider that a growth rate of 6% is the minimum desirable in most
African economies.
(5)
(b) With reference to Figure 1 and Extract 1, analyse why the growth rate of the
Sub-Saharan African economies was higher than that of Advanced Economies
between 2000 and 2010.
(8)
(c) With reference to Figure 2 and Extract 2, assess the benefits of foreign direct
investment in primary sector industries of countries in Sub-Saharan Africa.
(10)
*(d) With reference to Extract 2, evaluate the benefits to African countries of increased
trade with the BRIC economies.
(12)
*(e) With reference to Extract 2, to what extent might aid from the ‘BRIC’ economies
promote development in Sub-Saharan Africa?
(15)

Extract 1 US trade disputes
President Obama has promised that two million of the jobs which America needs to
create in the next five years are to come from doubling US exports. The US is to have
a National Export Initiative which will include an export promotion cabinet and a
policy of getting tough with trading partners who “have not played by the same set
of rules” as the US. A major problem is the undervaluation of China’s currency, the
renminbi, against the dollar.
President Obama will also have to settle several trade disputes, especially the one
with Mexico. Mexico imported $129 billion in American exports in 2009. In response
to trade union pressure, the US Congress cancelled a trial programme that allowed
Mexican trucks to travel more freely into the US. In retaliation, Mexico imposed
$2.4 billion in tariffs on a variety of American goods, resulting in a loss of $2.6 billion
in US exports and 25 000 jobs.
Additionally, in 2009, Brazil persuaded the World Trade Organisation (WTO) that
American government subsidies and loan guarantees to cotton growers violated WTO
rules. This ruling allows Brazil to impose $560m in retaliatory tariffs on cotton goods,
beauty products and cars. More importantly, Brazil is free to impose other penalties,
most notably ignoring US patents in the media, pharmaceutical and technology
industries. This retaliation by Brazil could result in thousands of American workers
losing their jobs.

5

10

15

Source: The Sunday Times, 14 March 2010 and the Financial Times, 12 March 2010.

Extract 2 The Chinese currency
The undervaluation of China’s currency, the renminbi, against the dollar has been a
source of tension between the US and China for some time. The Chinese government
has kept the renminbi at 6.83 per dollar since mid-2008 to protect its exporters from
the global recession and a contraction in world trade. China has accumulated a record
$2.4 trillion of reserves and $889 billion of US government debt, partly as a result of
its exchange rate policy. Global growth would be about 1.5% higher if China stopped
undervaluing its currency and running trade surpluses, according to Paul Krugman,
a leading economist. If China did not start to appreciate the renminbi over the
next few weeks, there was a good chance that the US would label China a ‘currency
manipulator’. That could allow the US to impose new tariffs on Chinese products.
Stephen Roach, Chairman of Morgan Stanley Asia said Paul Krugman’s call for a
stronger renminbi is “very bad” advice because the US trade deficit is due to a low
level of savings in the US. Boosting Chinese spending and increasing savings in the
US is a better way of reducing trade imbalances, according to Roach.
Source: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaDhEg_mZprU

28

*P38820A02840*

5

10

(a) With reference to Extract 1, explain the role of the World Trade Organisation (WTO)
(5)
(b) With reference to Figures 1 and 2 and to Extract 2, analyse the effects of an
undervaluation of the Chinese currency, the renminbi, for the US economy.
(8)
(c) To what extent might a higher level of savings in the USA be sufficient to eliminate
trade imbalances between China and the USA?
(10)
*(d) To what extent are large trade imbalances a cause for concern?
(12)
*(e) With reference to Extract 1, assess the impact of tariffs, such as those imposed by
Mexico and Brazil, on US consumers and producers. Illustrate your answer with an
appropriate diagram.
(15)

(Total for Question 5 = 50 marks)
TOTAL FOR SECTION B: 50 MARKS
TOTAL FOR PAPER: 100 MARKS
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Edexcel will, if notified, be happy to rectify any errors or omissions and include any such rectifications in future editions.
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